Definition and determinants of price elasticity

rendering and determinants of footing malleableityDefinition of honor elasticity (PES) to yield refers to a measurement of relationship between multifariousness in measure supplied and a transplant in worth. There is a few determinants that affects the outcome of the PES.One of the determinants is time degree. show go forth be to a greater extent elastic when time given to a compevery to intensify its allowance is more(prenominal). In short run, the time given to firms and companies ar too short to plant or wobble and adapt. For example, Sammys burger face a shortage of beef meat as raw material. It is inelastic if the time period is limited to a few hours make sensely if. The toll of the burger might change magnitude but the there is simple no opposite methods to help Sammy. In long run, time given to firms and producers be long enough to adjust their firm size and prep be for firms to enter or leave. In this way, Sammy would have enough time to hunting f or alternate way for new preferences.A nonher determinant is resource substitution possibilities, which means some groovys or production that can only be produced or made by using special proficiency or limited resources. These products have a very low elasticity of emerge or possibly adjust. However keens which atomic number 18 commonly produced that could be simply found have a relatively towering elasticity of tack on. Example, Louis Vuitton handbags argon all handmade from genuine leather, hence there are less products that whitethorn substitute it. The PES of Louis Vuitton is much more inelastic. doubtfulness 2B worthBusinesses can use the concept price elasticity to decide their pricing strategy by determining whether the not bad(predicate) to be sold is inelastic, elastic, unitary, perfectly inelastic, and perfectly elastic. If the price elasticity is inelastic it shows that the lot change in measuring stick prerequisiteed is less than the destiny change in pr ice. For example, good A is given a discount of 10%, but quantity motiveed only sum upd slightly by a 3%, thuslylyly is pass on be a smarter way to gain more amplification by increasing the price instead of decreasing and only quantity hireed ordain only decrease slightly. plot 2.1 shows the demand twine of this case.10% bar demandedDDiagram 2.1- Inelastic implore4%Furthermore, when the demand of a certain good is elastic it shows a scenario which the percentage change in quantity demanded is larger than the percentage change in price. For example, good B is an inelastic good, hence giving discounts or decreasing the price testament attract more customers, thus increasing the essence revenue of the business. Diagram 2.2 shows the demand curve of good B decreasing the price by 10% and earning 20% more quantity demanded. hurt10%D20% bar demandedDiagram 2.2- Elastic contendThirdly, if demand of a good is unitary elastic, which the percentage change in quantity demanded e quals to the percentage change in price. Any cut in price will be exactly off decide by a fall in quantity, leaving the broad(a) revenue unchanged. In Diagram 2.3, it shows that when given a 10% discount, quantity demanded will increase by 10% the total revenue earned is the same as before discount. Therefore, producer should decrease the price of product, manufacturing less goods salve more time and man power and redirecting it to an otherwise productive product. bell10%D amount of money demandedDiagram 2.3-Unitary Elastic10%When demand is perfectly inelastic, the quantity demanded will not change as the price change. Consumers will not response to any change in price at all. In diagram 2.4, it shows that when price decrease by 10% no changes are to be seen. Hence if producers increase the price of the product, quantity demanded will not be affected. expenditureD10%Quantity demandedDiagram 2.4- Perfectly InelasticPrice Last but not least is perfectly elastic demand, where only s light percentage change in price will cause an infinite percentage change in quantity demanded. This means that consumers have a great response to a change in price. Hence, producers should remain the price or follow the market value and not simply changing the price because a small change can bring an infinite change in quantity demanded.DQuantity demandedDiagram 2.5- Perfectly elasticQuestion 3A impart is the production of a certain good or product by suppliers or future suppliers for the market a variation of price at a certain time period. From the natural law of bring home the bacon, if the price of a certain good increase, so will the quantity supplied of the good. A supply curve is a graph that shows quantity of goods that producers will supply tally to the price. The graph will always sloped upwards to the right side because quantity supply is bigger at a dearer price. Diagram 3.1 shows how a supply curve is.PriceQuantity suppliedDiagram 3.1S0PriceThere are a few reasons s upply of a product will increase. If there is an increase in supply, the supply curve will faux pas rightwards. Diagram 3.2 shows a shift in the supply curve from S0 to S1.S1Diagram 3.2Quantity supplied number 1ly, a decrease or increase in the cost of make a good will determine the supply. In this case, cost of raw material or forwarding too will affect the cost price. If cost of raw material for a certain good drop, suppliers will tend to produce more good and hence the supply will increase. Example, the cost of dredge drops and results to an increase supply of bread. The drop in cost of flour the raw material of bread will lower down the cost of production thus suppliers will be adapted to produce more. Hence, the supply increases.Secondly, the improvement in technology will affect the supply of a certain good. Improvement in technology is able to decrease the cost of production and increase productivity of a certain good, thus resulting in an increase in supply of good at e very price level. For example, the development in robotic arms and computers enabled car manufacturers to produce cars in a faster pace yet with a vivid product. Hence, car manufacturers can cut cost at man power and alike costly mis masterminds. Supply will increase as the technology continues to develop.Last but not least, is the price of substitute goods and agonistical goods that may affect the supply of a good. Producing these goods requires similarly the same raw material. Hence, producers will choose to cut on the product which is more profitable and a better demand rate. Example, nukia N99 is more popular compared to nukia M99, thus producers will try to produce more nukia N99 which is more profitable than nukia M99. Hence supply of nukia N99 will increase.Question 3BEconomists are saying that price floor and price hoods can control the distribution of scarce good to those consumers who value them most highly. Price floor also know as minimum price is set preceding(p renominal) the equilibrium price to take effect. By doing so, goods have to be sold at a minimum price hence minimum profits are earned by suppliers. On the other hand, price ceiling or the maximum price is set below the equilibrium price to take effect, lowering the price will attract consumers. Diagram 3.3 shows the price floor and Diagram 3.4 shows the price ceiling.PriceSePeDPiece ceiling (Max. price)Diagram 3.3 Price CeilingQuantity DemandPriceDSQuantity DemandPiece Floor (Min. price)ePeDiagram 3.4- Price FloorS Supply curveD Demand curvePe Price Equilibriume Equilibrium pointRationing function of price is the increase or decrease in price to clear the market of any shortage or superabundance, while the resource allocation defines as an heart and soul of resource given to a party for a specific purpose. The price floor and price ceiling are said to be stifle the rationing function of prices and distort resource allocation because they are made by the government to make s ure suppliers gain profit. But this may result in surplus between demand and supply. As an example, good A is set at a price floor of $20 which is $5 more than the price at equilibrium. Some consumers are willing and able to buy the product at a higher price, and producers will continue supply good A. producers may raise the price of good A, but in return less consumer will buy it. This may result a surplus in the market. Other than that it also results distort resource allocation because not all products are able to be sell out.S Supply curveD Demand curvePe Price EquilibriumSPrice of good Asurplus$20PeDQuantity demand of good AFurthermore, once a price ceiling is put onto a good by the government, a shortage will happen between the supply and the demand of the product which eventually causes stifle of rationing function of prices and distorts the resource allocation. For example, flavors have a price ceiling of $3 per packet, which is determined by the government. In other words, consumers are able to buy salt at a much cheaper price. But suppliers will not be able to make a better profit hence supply will be limited by producers. This results to a shortage of salt in the market. Distort resource allocation occurs, thus not all consumers are able to buy salt because of the stocks are limited.Price of salt (per packet)S Supply curveD Demand curvePe Price EquilibriumQuantity of sugar (package)SShortagePe$3DQuestion 5AThe definition of demand can be defined as quantities of a good or service that people are ready and willing to buy at various prices within some given time period, other factor besides price held constant, ceteris paribus.Price of CintanFirst of all, a change in demand will cause the demand curve to shift rightwards. Other than the price of the good itself, there are a few other determinants that leads to a shift in the curve. Some of the determinants are price of substitute or complementary good, size of a household income, taste and fashion, w eather condition, and etc. the curve will shift rightwards if there is an increase in demand and vice versa. Example, a drop in the price of Maggie split second noodle which is the substitute of Cintan instant noodle drops from $3 to $2. In this case, the demand of Cintan will drop, hence the demand curve of Cintan will shift leftwards. This is because consumers will be attracted by the cheaper good and not the dearer one. According to the law of demand, as the price of a good decrease, the quantity demanded of the good rises and vice versa, ceteris paribus. Diagram 5.1 shows the demand curve of Cintan instant noodle shift from D0 to D1 when a there is a decrease in demand.D1D0Diagram 5.1Quantity DemandedOn the other hand, a change in quantity demanded is shown as a fecal matter along the demand curve. The one and only factor which can results a change in quantity demanded is the price of the good itself. When the price decreases, the quantity demanded will increase and vice versa , ceteris paribus. For example, in Diagram 5.2 an upward movement from A to B along the demand curve due to an increase in price of tall mallow from $5 to $8. The quantity demanded of cheese decreases from Qd0 to QD1 according to law of demand.Price of cheese($)8B5ADiagram 5.2DQd1Qd0Quantity demanded of cheeseD Demand curveA point AB point BQd Quantity demandedQuestion 5BIncome elasticity of demand (YED) shows the proportionatechangein thedemandfor a good inresponseto a change in households income. YED can also be explained as the percentage change in quantity demanded divided by the percentage change in households income. Below is the way YED is written down in formula formThe percentage change in quantity demandedYED =The percentage change in households incomeThere are several degrees affecting the YED. First degree of all is the positive YED. The outcome of the YED is a positive outcome, which means that demand will rise as income rise too. Positive YED can be further broken dow n into two categories, income elastic and income inelastic.Income elastic is said to be income elastic when the outcome is greater than 0 but lesser than 1 (0 YED 1) it is said to be income inelastic. This is because the percentage change in quantity demanded differs by a large percentage over the percentage change in households income. The good is known as luxury, example of luxury goods are branded items, sport cars, and branded clothes.Second degree of YED is negative YED, which is a negative outcome of YED value (YED 0). In this case, when demand falls, income rises. Goods under this degree are known as subordinate good. Example of inferior goods are second-hand items, replica items, and low class good.Last but not least is when YED equals exactly to zero (YED = 0 ). This only occurs when the quantity demanded does not change as the income changes. All the goods under this degree are necessity. Basic needs such as rice and salt are utilized on mundane life, hence income will not affect the demand.Question 6ADiagram 6.1 Consumer surplus is the difference between total amount that consumers are willing and able to pay for a good or service and the total amount that they very pay. producer surplus is the difference between what producers are willing and able to supply a god for and the price they actually receive. The level of producer surplus is shown by the area above the curve and below the market price.Price of goodConsumer SurplusS Supply curveD Demand curvePe Price equilibriumQ QuantityDSPeQuantity of goodProducer SurplusConsumer surplus shows the highest price customers are willing to pay and the market price that they are actually paying for. Consumer surplus tells us that customers gets the benefit from paying lesser than the actual price. The area under the demand curve and above the price equilibrium represents the consumers surplus. For example. A consumer whom is willing to pay $20 for Good A but the actual price for Good A is only $5 to hav e it. Hence the consumer surplus is $5 which is the value that is paid lesser than what he is willing to pay. Other than that, the area above the supply curve and under the price equilibrium represents the producers surplus. For example, producers are willing to sell their product shoe at a price of $100 but instead the market paid them $200. Hence, the producers received $100 more than they are willing to take, $100 is the producers surplus.(Geoff Riley, Eton College, September 2006, http//tutor2u.net/economics/revision-notes/a2-micro-consumer-producer-surplus.html .)Question 6BScarcity, choice and opportunity cost are the three basic concepts of economics. Scarcity is a case where human needs are in unornamented compared to resources available. Choice is the time where humans are force to make a choice by scarcity between two or more choices. But for every choice humans make, another will be sacrificed, and the sacrificed choice are known as opportunity costs.The above concepts a re best explained by a production possibility frontier graph (PPH) that shows various maximum combination of two outputs that the parsimony produce. A few assumptions are set on the PPF graph- only two products produced, efficient production, fixes production, and fixed technology. Moreover, any points outside the reach of the PPF is unattainable points and the point which lies beneath the PPF is manageable to achieve and is also known as attainable points but usually not desirable, inefficient points. While points on the curve are possible outputs that is known as efficient points.EBA109C85D24310Diagram 6.1CombinationsTelevisionRadiosA010B19C28D35E40Table 6.1In this case, the society faces a scarce resource to produce televisions and radios. Therefore, the society will have to make a choice to produce which good more or less. If combination A is chosen, 10 radios will be produced while none for television. 4 television are sacrificed or taken as opportunity cost. The following c ombinations happens as the table shown above.